Nordhoff Investments v. Zenith Electronics Corp.

• Decision Date: 21 June 2001
• Docket Number: No. 00-2249,Nos. 00-2250 and 00-2249,No. 00-2250,00-2249,00-2250,s. 00-2250 and 00-2249
• Parties: (3rd Cir. 2001) NORDHOFF INVESTMENTS, INC. v. ZENITH ELECTRONICS CORPORATION, JOHN D. MCLAUGHLIN, JR., Esq., Trustee. OFFICIAL COMMITTEE/EQUITY SECURITY HOLDERS, v. ZENITH ELECTRONICS CORPORATION, PATRICIA A. STAIANO, Trustee. NORDHOFF INVESTMENTS, INC. v. ZENITH ELECTRONICS CORPORATION, PATRICIA A. STAINO, Trustee. Official Committee/Equity Security Holders, Appellant at Nordhoff Investments, Inc., Appellant at
• Court: U.S. Court of Appeals — Third Circuit

Page 180

258 F.3d 180 (3rd Cir. 2001)

NORDHOFF INVESTMENTS, INC. v. ZENITH ELECTRONICS CORPORATION, JOHN D. MCLAUGHLIN, JR., Esq., Trustee.

OFFICIAL COMMITTEE/EQUITY SECURITY HOLDERS, v. ZENITH ELECTRONICS CORPORATION, PATRICIA A. STAIANO, Trustee.

NORDHOFF INVESTMENTS, INC. v. ZENITH ELECTRONICS CORPORATION, PATRICIA A. STAINO, Trustee.

Official Committee/Equity Security Holders, Appellant at No. 00-2249.

Nordhoff Investments, Inc., Appellant at No. 00-2250.

Nos. 00-2250 and 00-2249

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued January 23, 2001

Filed June 21, 2001

Appeal from The United States District Court for the District of Delaware (D.C. Nos. 99-CV-00921, 00-CV-00031 and 00-CV-00032) Honorable: Gregory M. Sleet.

Arnold S. Albert, Esq. (Argued), Albert & Schulwolf, Washington, DC. Thomas G. Macauley, Esq., Zuckerman, Spaeder, Goldstein, Taylor & Kolker, Wilmington, DE, Counsel for Nordhoff Investments, Inc., Appellant at No. 00-2250.

Thomas D. Schneider, Esq., Philadelphia, PA, Counsel for Official Committee of Equity Security Holders, Appellant at No. 00-2249.

James H.M. Sprayregen, Esq., Ilana S. Rubel, Esq., David J. Zott, Esq. (Argued), Kirkland & Ellis, Chicago, IL. Laura D. Jones, Esq., Pachulski, Stang, Ziehl, Young & Jones, Wilmington, DE. Eric S. Kurtzman, Esq., Pachulski, Stang, Ziehl, Young & Jones, Los Angeles, CA Counsel for Appellee Zenith Electronics Corporation.

BEFORE: NYGAARD, ALITO, and FUENTES, Circuit Judges.

OPINION OF THE COURT

NYGAARD, Circuit Judge:

This case presents the consolidated challenges by Nordhoff Investments and the Official Committee of Equity Holders to the District Court's order approving the Bankruptcy Court's order confirming Zenith's bankruptcy and restructuring plan. Zenith argues, as it did below, that the challenges posed to its restructuring plan are "equitably moot" because the plan has already been substantially consummated, has been relied upon by various parties, and would be very difficult to retract. The District Court thoroughly reviewed all of the relevant considerations and found the challenges equitably moot. We accept the lower court's findings of fact "unless they are completely devoid of a credible evidentiary basis or bear no rational relationship to the supporting data," Moody v. Security Pacific Bus. Credit, Inc., 971 F.2d 1056, 1063 (3d Cir. 1992). Furthermore, "because the mootness determination we review here involves a discretionary balancing of equitable and prudential factors rather than the limits of the federal court's authority under Article III, using ordinary review principles we review that decision generally for abuse of discretion." In re Continental Airlines, 91 F.3d 553, 560 (3d Cir. 1996) (en banc); see also In re PWS Holding, 228 F.3d 224, 235-36 (3d Cir. 2000). We find no such abuse of discretion and therefore will affirm.

I. Background

Zenith has suffered critical losses over the past twelve years. LG Electronics invested $ 360 million in Zenith during that difficult period, increasing its holdings from five percent to fifty-eight percent and occupying six of the eleven seats on Zenith's Board of Directors by 1997. Zenith attempted to find an outside investor willing to purchase its business, but no buyers came forward after Zenith's CEO personally met with executives from Microsoft, Intel, General Instruments, and other leaders in the electronics industry.

Zenith continued to suffer losses and LGE proposed a major restructuring of Zenith's debt and equity in April of 1998. A special committee of Zenith's Board of Directors negotiated with LGE and agreed to a plan. After forming their own advisory committee and obtaining counsel from legal and financial advisors, the bondholders also agreed to the plan. The plan included: 1) exchanging approximately $ 103 million in bonds bearing interest at 6.25 percent for $ 50 million in new bonds bearing interest at 8.19 percent; 2) canceling Zenith's stock for no consideration; 3) issuing new Zenith stock to LGE in exchange for $ 200 million of debt relief forgiving debt owed to LGE; 4) LGE extending a new $ 60 million credit facility to Zenith; 5) canceling approximately $ 175 million in additional debt owed to LGE in exchange for $ 135 million of new debt and ownership of the Zenith television plant in Reynosa, Mexico; 6) refinancing of debt owed to a consortium of banks led by Citicorp; 7) no alteration of debt owed to trade creditors; and 8) releasing LGE, Zenith directors and officers, and the Bondholder's Committee from potential liability to Zenith or certain creditors.

Zenith submitted the plan to the Securities and Exchange Commission. The SEC reviewed the plan for twelve months and eventually declared it effective. Despite the reduced face value of their claim, the bondholders overwhelmingly voted in favor of the plan. LGE and secured lenders including Citibank, also approved the plan. Zenith met often with the Equity Committee during this time and provided the Committee with all of the information that it requested. Zenith then filed a Chapter 11 bankruptcy petition and sought final court approval.

The plan was submitted to a Bankruptcy Court in the District of Delaware. Nordhoff, a significant minority shareholder in Zenith, and the Equity Committee, which represented the interests of the other minority shareholders, both opposed the plan and were represented by counsel at the two-day proceedings. Over Nordhoff and the Equity Committee's objections, the Bankruptcy Court approved Zenith's request for an expedited hearing. The primary point of contention concerned competing valuations of Zenith. Peter J. Solomon, Co. valued Zenith at $ 300 million. That valuation was corroborated by the fact that Zenith had been unable to sell at a related price, the bondholders' agreement to reduce their claims, and other relevant valuations. Ernst and Young, appearing on behalf of the Equity Committee, valued Zenith at $ 1.05 billion, which was based on a discount rate the "same as Microsoft's" and a higher royalty rate than calculated by Solomon. Nordhoff and the Equity Committee attempted to discredit Solomon by presenting evidence that Solomon had a conflict of interest based upon its previous relations with Zenith and would receive a $ 1 million award if Zenith's plan was successful.

The Bankruptcy Court ultimately accepted Solomon's valuation over Ernst and Young's and decided that: 1) "Zenith's Plan [was] proposed in good faith under the general requirements of the bankruptcy code"; 2) the plan was entirely fair; 3) LGE had acted appropriately; 4) Zenith's disclosure statement contained a wealth of information, the plan was approved by SEC, and it complied with nonbankruptcy law and the Bankruptcy Code; 5) the "shareholders are receiving the value of their interests under the plan--nothing"; 6) Solomon's valuation was not tainted; and 7) this "reorganization is exactly what chapter 11 of the Bankruptcy Code was designed to accomplish."

The Bankruptcy Court conditionally confirmed the plan and rejected Nordhoff and the Equity Committee's objections on November 2, 1999. The Bankruptcy Court permitted the release of all claims by Zenith, but refused to allow the release of claims by creditors who did not vote in favor of the plan. The Court therefore required Zenith to delete any release by claimants who had not affirmatively accepted the plan. The Court granted Zenith ten days to make these modifications.

Nordhoff and the Equity Committee received the Bankruptcy Court's opinion on November 3. Zenith immediately made the required changes and submitted the amended plan to the Court on November 4. Zenith served the Equity Committee with the amended plan on November 4, but, because of what they testified was an "oversight," Zenith officials did not serve Nordhoff with the amended plan at this time. The Court signed the amended confirmation order on November 5, but did not immediately notify the parties. Nonetheless, Zenith learned that the order had been signed via the Court's public web cite on November 5. On November 9, Zenith officials faxed a letter to Nordhoff and the Equity Committee stating that they "understand that the court signed the confirmation order on November 5." Zenith received a signed copy of the confirmation on November 10 and faxed copies of the amended plan and the Court's confirmation order to Nordhoff and the Equity Committee the same day. Nordhoff and the Equity Committee filed notices of appeal to the Bankruptcy Court on November 12. At no point, however, did either Nordhoff or the Equity Committee seek to stay the plan.

Both the proposed and final plan called for "Immediate Effectiveness," and it was clear throughout the proceeding that Zenith intended to implement the plan immediately upon approval. As a result, much of the plan was executed between November 5, when the Court confirmed, and November 10, when Nordhoff was first officially notified. The following transactions were completed by November 9: 1) Zenith replaced its debtor-in-possession credit facility with a new $ 150 million facility syndicated by Citicorp; 2) Zenith entered into a new $ 60 million credit facility with LGE; 3) Zenith canceled old stock and issued new stock to LGE; and 4) Zenith canceled certain debt owed to LGE, issued new debt to LGE, and canceled some of the new debt in exchange for the transfer of the Reynosa plant at a later date. Zenith's bondholders, however, did not begin to tender their $ 103.5 million in old bonds for $ 50 million in new publicly traded instruments until November 19, 1999. Nearly all of the bonds were exchanged by January 3, 2000, and they have been subject to public trading ever since. If bondholders did not own a sufficient amount of debt to receive a new bond, their holdings were aggregated and sold on the open market. The cash proceeds were then allocated to the fractional holders. Zenith management has...